Monday, 30 March 2015

A Simple Summary of Scotland's Economy

I've spend a lot of time looking at GERS and associated arguments - this is the simplest summary I can offer

1. Scotland's deficit relative to the rest of the UK (rUK)

When Scotland's deficit per capita is lower than the rest of the UK we are a net contributor (above the line); when it's higher we are a net beneficiary (below the line)

Scotland has been a net contributor to the UK economy in three of the last 15 years.

The five year historical period used for most of the Yes campaign's "average" assertions included a clear outlier in 2008-09

The Scottish Government White Paper was written using 2011-12 as a starting point - since then Scotland's performance relative to rUK has declined dramatically. As we'll see this is almost entirely explained by oil revenues.

As long as Scotland is in the UK and the Barnett Formula (or equivalent) is maintained the people of Scotland are spared from the impact of any relative economic under-performance because we pool and share resources UK-wide

In the two most recent recent years this pooling and sharing has been worth over £800 for every person in Scotland

2. How Scotland's revenue and expenditure compare with rUK

The gaps between the black revenue and red expenditure lines on this chart are the deficit figures we were looking at in the first chart

We can see that - as oft stated by the SNP - in each of the last 15 years Scotland (including geographical share of oil & gas revenues) has indeed generated greater tax Revenue per capita than the rest of the UK

We can also see that - as less oft stated by the SNP - Expenditure per capita is consistently higher in Scotland (and that the gap has actually increased over the last 15 years)

The are some structural reasons for the higher per capita expenditure levels in Scotland. To quote directly from GERS "lower population density in Scotland relative to the UK [..] increases the cost of providing the same level of public service activity, particularly in areas such as education, health and transport"

Of course only when the relatively higher levels of Revenue raised exceed the relatively higher levels of Expenditure made is Scotland's deficit less than that of the rest of the UK. Again; three of the last 15 years where the black line is above the red.

3. The significance of Oil & Gas

The difference between the black Revenue line in this chart and the preceding one is that I've simply removed Oil & Gas revenues

It should be clear to everyone that without the "bonus" of Oil & Gas Scotland consistently generates lower Tax Revenues per capita than the rest of the UK

4. The Trend & Outlook for Oil & Gas

The extent to which 2008-09 and 2011-12 were particulary good years for oil & gas revenue is obvious

The Scottish Government oil & gas revenue forecasts used in the White Paper were optimistic when it was published (the "low" scenario was 60% higher than the OBR forecasts that existed at the time)

The White Paper forecasts have subsequently been shown to have in fact been recklessly optimistic. The red portion of the graph is the difference between the White Paper scenarios and actual figures or (lightest grey) latest OBR forecasts

It is now widely accepted that even the levels of Oil & Gas Tax revenues enjoyed in 2013-14 are unlikely to be repeated in the foreseeable future

So What?

Given further oil revenue declines since the most recent GERS numbers, if today we were preparing for independence we would be preparing for every Scot to immediately be at least £1,000 pa. worse off

Without repeating the indyref arguments let's simply note that this is before factoring in short term downsides of independence (currency negotiations, increases in unemployment due to jobs shifting South, one-off costs etc) or the (in my view highly debatable) possible long term benefits

If we succeed in achieving Full Fiscal Autonomy (as is the SNP's stated current aim) we will be making every person in Scotland over £1,000 worse off (unless oil booms again)

Over time we might see economic growth relative to rUK sufficient to off-set the higher expenditure we currently require - but that seems to be both a highly optimistic assumption and one that implicitly accepts years (decades?) of hardship before we'd get there

If you are curious as to the detail of where the revenue comes from and cost goes please read the following

The SNP are fond of quoting deficit as a percent of GDP when making comparisons. This has some merit but is internally inconsistent because we are allocated a per capita share of the debt cost (not a GDP share) so what matters is our per capita contribution to that debt. If the SNP want to argue that % of GDP is the right measure then GERS should allocate debt cost on a GDP share basis and when negotiating debt split on independence they should argue that Scotland deserves it's GDP share of the debt. They don't. There are also issues due to the high proportion of foreign owned Scottish GDP which means much of the benefit of that GDP doesn't fall to Scotland's citizens. GNP may be a better measure but let's not get bogged down with that here. Caveats now given; for completeness here's the relative deficit graph on % of GDP terms;

22 comments:

Terry Summers
said...

Kevin,Congratulations his is as simply and clearly explained as humanly possible. Anyone who cannot get it now must be a die hard 'Independence at any cost' nationalist.Thanks for all your hard work.CheersTerry

Hi Kevin,I'm a business analyst, so when I started looking at all this stuff, a few months before the referendum, I spotted *some* of the issues you've highlighted. And even that limited realisation was enough to swing me back to a no vote (which I had been originally, but mainly because I'm English living in Scotland, and see more similarities than differences between the two nations).

Bu you're doing a cracking job in making things clear, as well as uncovering many of the issues that I'd missed.

Kevin,After the intervention today of a well known tax exile and supporter of Scottish Independence calling for FFA, I was wondering if he had ever seen your exposition of the problems of FFA. It led me to wonder why the Unionist parties campaigning in this GE have not picked up and used this devastating argument to the one and only SNP policy. Further, I wondered why these parties with their numerous research staff and savvy politicians had to leave it to for you to do in your spare time.I am so glad that you have done this work, but it reflects badly on our political parties that they have not attacked and demolished the SNP position on FFACheersTerry

first, thanks for this and all the other blogs - if as it seems in Scotland we are going to have to go around the constitutional merry-go-round for the foreseeable future, then it is important to keep the numbers front and center, so that we can have an honest debate.

For what its worth, I believe FFA is not about the economy for the SNP but, as all things with them, about politics and seeking to gain some form of electoral advantage (supporting the good/bad Red Tories etc.).

I don't think they can't do the sums, they must know the numbers are bad (hence the recent and ongoing retreat from any chance of imminent implementation of this policy). At best, they are hopelessly optimistic about the benefits from independence, at worst they don't care and are being deliberately deceitful - my money is on the latter.

What are the political benefits? as far as I can see

First, it is part of "the dream that never dies" - why campaign on useful implementation or enhancement of Smith when you can go for "indy lite" - similarly, the regular references to "indyref2" - a means of keeping the new and enthused yessers on board - much easier than boring and more complex politics about improving the lot of the country (don't think have I missed anything beneficial to the Scottish people in the last 8 years)

Second - another grievance to set up, another reason for their failure to deliver - if only we had FFA ... (you have heard all the rest before).

third, as you mentioned in another blog, if God-forbid, this happened, things would be so bad that going for complete separation couldnt be seen to be any worse (almost certainly not true - but a very good campaign line) - and what suits the SNP more, raising people out of poverty, developing our education system, growing the economy or a continued sense of alienation and despair?

finally, to Terry's comment, certainly Labour and the Conservatives have highlighted this, but we are still in post referendum mode, with any criticism of SNP being responded to by "scaremongering", "doing Scotlnad down" or "too wee, too poor, too stupid" and the like - at some point we will end up with more rational debate again, but not any time soon I fear

Kevin, I'm sure that you'll be glad to know that I am still reading your posts. I've resisted commenting for the reasons I stated in my last post a week ago.

However, I needed to get this off my chest.

I read that people are wondering why your analysis of the economic plans for the SNP are not being taken up by the mainstream parties. Indeed why the electorate at large are not reading them more widely.

Its simple. Because no matter how accurate, detailed, simplified-made-easy for the masses, you break down the SNP figures, you are a partisan commentator.

You are as anti-SNP as Stuart Campbell is anti-Scottish Labour.

And you know what, not only you are partisan, but so are your readers. And that is why your work goes no further - its because you're preaching to the converted.

And what disappoints me most, is that you apply your considerable knowledge of economics to trying to prove the case against the SNP only.

You say that you want to offer people choice, then we need to see the choice that an equally detailed demolition of the UK economy takes place too. Show us the graphs and charts for where the UK is over-spending and under-taxing. Show us why we should trust a Tory or Labour economic plan.

In May we're voting in a General Election. The choice is between returning the current Conservative PM in another likely minority government or putting a Labour-minority government in power. It's going to be their economic plans that we're going to be living under for the next five years.

Whatever concessions the SNP get, should they be the power-brokers/king-makers or whatever you want to call them, ultimately it will be a Tory or Labour chancellor making the economic decisions.

And what you clearly do not understand or acknowledge in Scotland is why the SNP are heading for a near-whitewash of seats. It's not because the 100k+ members are all deluded mad-as-a-hatter Nats; and its not because all of those swathes of former Labour voters are voting SNP this time have lost their minds; and nor is it that normal people like me will be voting SNP because we are insane.

Its because we no longer trust the Unionist parties to do the right thing for Scotland. We have lost their trust. We do not trust Westminster to deliver for us.

So, if you want to influence those people who matter - the floating voters who have seen the SNP as the catalyst for change - then its them you need to address. Not dyed in the wool Unionists.

There is one enormous and easily analysed economic issue here which is the economics of separation. I focus on it because it's really easy to analyse and the GERS numbers are poorly understood.

It so happens that (as I think I show) the case is so compellingly against the SNP's strategies of independence and FFA that I can't come out of the numbers with any conclusion other than that they are either economically illiterate or willfully reckless with the economic well-being of ordinary Scots. That party political point is (in my view) an inevitable conclusion of looking at the numbers.

This isn't my job, it's something I do out of interest. The wider UK picture is far more complex and nuanced and there isn't such a simple binary option to analyse (other than possibly EU exit when that debate comes round). So I don't analyse the wider UK because I still have a full-time job running my business and I'm increasingly involved in charitable activities and trying to engage at a practical level with issues such as in-work poverty and quality of education. So I make no apologies for limiting the scope of my blogging.

Frankly I don't give two hoots if I'm perceived as biased. I have been very clear and open throughout about my prejudices, preconceptions, possible sources of bias ... and I have shared my workings all the way. People who can't differentiate between robust analysis of actual data and political spinning of numbers will think me biased. But I am not affiliated with any party (although I will offer advice if asked) and I do this because I feel strangely compelled to try and correct understanding when I see so much misinformation used in public discourse.

As I've said before - with respect - this blog is something I do for fun and for my own satisfaction; it's not a request service!

But if your goal is to disseminate to as wide an audience as possible your conclusions about the impact of independence or FFA on Scotland, then I personally think you need to change the tone.

The majority of your readers and followers on Twitter are convinced of your argument already. They will no doubt share their thoughts on your posts with their friends, who will be convinced already too. All you are doing is reinforcing their views.

If any pro-Independence person, like me for instance, takes the time to read and comment on the blog, they will see a wall of anti-independence comments. And that is not conducive to good discussion.

People have extremely entrenched views on politics, and your blog is unashamedly anti-indy/ffa/SNP. Fair enough. I get that.

But the question for me is how many people's opinions have you changed?

And you guys who read and comment here need to ask why is the SNP in such a strong position, despite your claims for the financial suicide that voting for them would bring. Why are Scots not voting for Labour?

Thanks for an honest position statement from you both. The conclusion I draw is anyone intends to vote SNP on an 'FFA Demand' ticket this May does so for reasons other than economic advantage. A perfectly honourable position but one I fear the SNP know if they espoused would not be able to retain their current popularity.

Kevin needs no-one to defend his position, but the SNP's determination to obscure and confuse on FFA and Scotland's economic relation with rUK in general has resulted in his blog. If they were straight with the sums in the first place these graphs wouldn't be needed.

Full Fiscal Autonomy, a phrase the FM cannot even say.Does she want it? With a plan to increase spending over the next parliamentary term, this suggests not in the medium term.Wonder why?Also at FMQ's our FM mentioned the extra spending of £140bn plus. Curious, I thought it was originally up to £180bn a few weeks ago.So, is this a spending cut?

If we had voted YES, the fiscal prognosis from the 24th March 2016, well, will leave to your imagination.

One could say Alex Salmond's golf ball is somewhere in the heavy rough. Will it ever be found?

Gordon Wilson, ex SNP leader was somewhat prescient, (with reference to the Edi Uni study) saying it was not the "vow" that cost the referendum it was the economic case.

Jason,this is a new tack on your behalf, gone through 'Whitabootery' onto diversion into other subjects and are now giving advice on how to get the message over more effectively to the unconverted?Does this mean you now accept that Kevin's analysis of FFA is correct?CheersTerry

Beyond the Budget Nicola SturgeonFirst Minister of Scotland London School of Economics and Political ScienceMonday 16 March 2015Extract from speech available on line.That’s why the Scottish Government has set out an alternative approach – one based on limiting real terms spending growth to 0.5% a year. That policy - of very modest spending increases instead of cuts - would still see the debt and deficit reduce as a proportion of national income in every year from 2016-17; but it would also free up an additional £180 BILLION across the UK over the next parliament. That money could be used to invest in infrastructure and innovation, protect the public services we all depend on and ease the pressure on the most vulnerable in our society

From FMQ’s 02.04.2015http://www.scottish.parliament.uk/parliamentarybusiness/28862.aspx?r=9894&i=90598#ScotParlOR

The First Minister:

I have proposed an alternative to that. I have made a proposal for modest spending increases in the next Parliament that would deliver additional spending of more than £140 BILLION. That is the alternative to the £30 billion cuts that Labour has signed up to over the next two years. There is the choice that people face. It is very clear. They can vote for Labour, the Tories or the Liberals for more austerity cuts or they can vote SNP for a clear alternative to austerity.

What is the value per person of revenue raised from "Scottish water" included in all lines (GoS, revenue + any other heading not made clear), in the latest GERs.

Yours faithfully,

Agnieszka Macierewicz"

Reply

"As shown in the Consolidated Income Statement on page 58, Scottish Water’s gross surplus was £437.1m in 2013-14. This is equivalent to approximately£80 per person, given Scotland’s population of 5.3 million people. Information on Scotland’s population is available at:"

Just shortly before the Scottish independence referendum last year figures came out that showed Slovak GDP per head had grown to a point that it was greater than Czech GDP per head.

I'm not suggesting Slovakia is Scotland. However, there are some parallels. Czechoslovak federal politics became unworkable between 1989 and 1992 as Slovakia and the Czech Republic went in different political directions. During the debate on the split some pretty hard things were said about Slovakia's economic capacity and its dependency on the Czechs. Slovakia was indeed far behind the Czech Republic at the time of the split. Czech GDP per head was about about a third higher. Slovakia did go through hard times after the split politically and economically, with high unemployment. The currency split went relatively smoothly (I was living in the Czech Republicg at the time but if you don't believe me, it's also what the then Czech prime minister Vaclav Klaus says).

It also seems pretty hard to believe that Slovakia would be outstripping the Czech Republic now in terms of economic performance if Slovakia had not become independent (and thereby taken both control and responsibility for itself).

They are created by SG using their own methodolgy - they were the figures they used to underpin the economic claims made in the White Paper - if the SG are so incompetent that their own analysis of figures is meant to be complete rubbish we're in bigger trouble than I thought

Re Anonymous 15 April and the possible comparisons with Slovakia. Yes you're right, almost certainly the mutually agreed separation of Slovakia from the Czech Republic allowed the former to grow faster (or perhaps less slowly than the latter) economically. As did other related factors such as its accession to the EU. However, the fact that a smaller country has once split from another and prospered does not of itself make any case for the viability of Scotland's independence. Another twenty examples from elsewhere would not prove its specifics any more conclusively. The point that this blog is admirably trying to drive home is that the numbers have got to add up, and they just don't. "They did it, so can we," may sound great, but it's no substitute for honest appraisal of the figures.